Competitive broadband provider RCN Business (NASDAQ:RCNI, news, filings) on Friday announced that it has agreed to a buyout offer from private equity firm ABRY Partners. The price of $15/share represented a 22% premium to the stock price before the announcement, and along with the assumption of debt the total value of the deal is $1.2B. It’s not a done deal yet, as RCN can still solicit competing offers for another 40 days. In the meantime, the company has canceled its Q4 earnings call. Whether they get any depends on how prospective buyers view their two components.
On this site though, I’ve always been partial to their metro fiber business that was assembled from their own build and that of ConEd Communications and Neon. That business should have finished 2009 with revenues in the range of $190M, and EBITDA in the neighborhood of $64M. Metro fiber has been getting more of the respect it deserves of late, and as an independent entity RCN Metro would itself probably pull in an EV/EBITDA multiple of at least 7-8 in a sale, or $450-500M on its own. I suspect some of the metro fiber devotees known to haunt these parts would call that a lowball price, actually. But even that much is 40% of the value of the proposed deal for just 25% of the overall company.
That puts the value of the residential and SME business at just a 4.5-5 multiple on its own. Of course, it does have lower EBITDA margins and isn’t growing. But my question is this: just what part of RCN does ABRY Partners value? I don’t know them well, but their reputation is as a player in the media space. A quick look at the investments they list on their website does include some operators with some metro fiber – Integra Telecom amongst them – but mostly they seem to be interested in the triple play and SME side of things.
I do feel that an alternative bidder could arise for RCN, or perhaps that the board might find greater value in breaking up the assets. There are quite a few bidders out there that might value RCN Metro’s business quite highly if it were sold independently.
I particularly like the fit with TW Telecom (NASDAQ:TWTC, news, filings), which despite having the deepest national metro fiber footprint amongst competitve providers is not so strong in RCN’s major east coast markets of New York and Washington, and nonexistent in Philadelphia or Boston. Frankly, the fit is almost perfect from a strategic point of view. Add in TW Telecom’s current refinancing project, perhaps they have been lurking in the shadows on this one already. Another possibility could be abvt which through such an acquisition would add unique depth in all its major northeast markets and enter smaller satellite markets as well.
Of course, ABRY might be after the metro fiber themselves – one never can tell.
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Categories: Cable · Mergers and Acquisitions · Metro fiber
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Nice summary, Rob. I am amazed no one commented on this.
There seem to be two camps: 1) Ho hum, and 2) Thieves! I found the deal a bit surprising, I wasn’t expecting a private equity move on RCN right now.
The triple play residential; is a tough row to hoe, especially in FIOS territory.
The retail model is complex, expensive and full of churn. The residential and SME segments typically on;y value low price … so unless you are a low operating cost provider with scale (ie. FIOS) … it is a tough climb.
What I do like is PE firms stepping in as strategics wait … the strategics can either buy the parts if a PE firm chooses to sell parts opr they can pay 3x in a few years if the PE firm capitalizes the company.
For my tastes, I like the business, large Enterprise, big pipe carrier business that still need fiber installed in 90$% of business buildings in America … even though a PE firm tries to value this segment on an apple-to-oranges basis. (aka stealing).
A well run Strategic buyer could just as easily (more easily) buy the company and spin off the cable assets to another strategic buyer. There is no doubt the parts are worth more than the sum.
I think the issue is the “Strategics” in this sector are so focused on their knitting that a more complex transaction with more moving parts is not in the cards.
The biggest issue for any buyer is how to split the fiber assets. Some are “cableco”, some are “metroco”. From afar, I cannot see the two companies being separated anytime in the near future for that reason alone.
I think that applies mainly to the original RCN build, most of the RCN Metro fiber now derives from non-cableco sources. But yes, I agree there would be complications.